"ITC on Construction Costs: A Post-Budget Review in Light of the Supreme Court's Safari Retreats Case"

[CAJOYDEB BHATTACHARYA]

The Hon’ble Supreme Court of India made several key observations regarding the constitutional validity of Section 17(5)(c) and (d) of the CGST Act, 2017, and the issue of Input Tax Credit (ITC) in the case of the CHIEF COMMISSIONER OF CENTRAL GOODS AND SERVICE TAX & ORS. VERSUS M/S SAFARI RETREATS PRIVATE LTD. & ORS. - 2024 (10) TMI 286 - SUPREME COURT. Though review petition is filed by the revenue before the Hon’ble Apex Court, however the aforesaid judgment of the Hon’ble Apex Court shall be a game changer in relation to availability of Input Tax Credits on Construction Cost. However, the Finance Bill 2025 has proposed an amendment in clause (d) of Section 17(5) of the CGST Act, 2017 wherein the phrase “plant or machinery” has been substituted by “plant and machinery” retrospectively with effect from 1^st July, 2017 [Refer clause 119 of the Finance Bill 2025]. In this article, by analysing the provisions of Section 17(5), clause (c ) and (d), of the CGST Act,2017 in light of the Hon’ble Apex Court’s Judgment, I wish to share my views on the validity of the Apex Court’s verdict after enactment of the retrospective amendment proposed in the Finance Bill,2025.

What the provisions say

Goods and Services Tax Laws was envisaged to have seamless flow Input Tax Credits. However, in reality, in many cases the ITC is denied or blocked even if it is for the purpose of furtherance of business. Section 17(5) of the CGST Act,2017 is a non-obstante provision in the Act which deals with Blocked ITC on certain expenses even though otherwise it is available as per the Act. In Section 17(5), clause ( c) and clause (d) are dealing with disallowance of ITC on construction activity. For reference, I wish to quote the provisions below:

“17(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:
……………..

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.—For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;”

Apparent meaning of the aforesaid provision:
 

By reading the aforesaid provisions of CGST Act, 2017 the following can be derived:

1. Works Contract Services procured for construction of immovable property is not available for ITC, if capitalised in books of accounts. However, ITC is allowable if works contract service is availed for further supply of works contract services. Also ITC is available in respect of Plant and Machinery.
2. Goods or Services or both received for construction of immovable property on own account is not available for ITC if the same is capitalised in books of accounts. However, ITC is available if goods and/or services are used for construction “plant or machinery”

So, the legislature has used the term “plant or machinery” in the exclusion portion of clause  (d) of Section 17(5). Further, in the said provision though meaning of the term “plant and machinery” is defined, however, no definition in GST laws was provided in regard to “plant or machinery”. From an apparent reading one can interpret that if goods and/or services are procured for construction of “plant” or “machinery” then ITC is allowed.

Issues for consideration before the Apex Court

1. Whether the definition of “plant and machinery” in the explanation appended to Section 17 of the CGST Act applies to the expression “plant or machinery” used in clause (d) of sub-section (5) of Section 17?

2. If it is held that the explanation does not apply to “plant or machinery”, what is the meaning of the word “plant”? and

3. Whether clauses (c) and (d) of Section 17(5) and Section 16(4) of the CGST Act are unconstitutional?

Key Observations by the Hon’ble Apex Court

1. The explanation to section 17(5) defines “ plant and machinery”. However, no where in the CGST Act “plant or machinery” is defined. Clause ( c) and clause (d) of the CGST Act do not exclude every classes of immovable properties from the applicability of ITC. As per clause (c ) if the construction is of “plant and machinery”, the benefit of ITC will accrue. Similarly, under clause (d) if the construction is of “plant or machinery”, ITC will be available.

2. As per the well settled principle of interpretation of taxing statute, there is no scope to give any meaning to clause ( c) of Section 17(5) other than its plain and natural meaning. The “plant and machinery” is defined in the explanation to section 17(5) of the CGST Act,2017. Works contract service is also defined in the CGST Act. Therefore, there is nothing to add or subtract from the clause ( c) of Section 17 of the CGST Act. As ITC is a creation of legislature, it can exclude specific categories of goods or services from ITC and such exclusion, per se will not defeat the object of the CGST Act.

3. The phrase “plant and machinery” is used in the CGST Act at several different places. However, the term “plant or machinery” is only used in Section 17(5)(d) of the CGST Act. Therefore, it has been inferred that the legislature has intentionally used the expression “ plant or machinery” in clause (d) of Section 17(5) of the CGST Act,2017. Therefore, the expression “plant and machinery” and “plant or machinery” cannot have the same meaning.

4. The expression “plant or machinery” can either be “plant” or “machinery”. No where in the GST Laws, the word “plant” is defined. To derive the meaning of the term “plant”, the Hon’ble Apex Court has referred some judgments like COMMISSIONER OF INCOME-TAX, AP VERSUS TAJ MAHAL HOTEL [ 1971 (8) TMI 2 - SUPREME COURT] and COMMISSIONER OF INCOME-TAX VERSUS ANAND THEATRES[ 2000 (5) TMI 4 - SUPREME COURT]. In this regard the Apex Court has held that dominant functionality test shall be carried out to determine whether a building can be considered as a “ plant” or not. If it is found on facts that a building has been so planned and constructed so as to serve assessee’s special technical requirements, it will qualify to be treated as ‘ plant’. For the purpose of Section 17(5)(d) ‘plant’ should not be given a restrictive meaning to exclude land, buildings etc. The Hon’ble Apex Court has considered the Mall as a plant because by constructing it the service provider generates taxable service on which GST Liability is discharged. Therefore, by using the building taxable output services are generated and in those cases the Hon’ble Apex court has stated the Mall shall be treated as a “Plant”. For this purpose, the Hon’ble Apex court has taken the reference from income tax laws as well.

5. Activity of Renting or leasing buildings is already covered under Schedule-II of the CGST Act,2017 as supply of service. Even the activity of construction of building is a supply of service if the total consideration is collected before getting Completion Certificate. Therefore, building can be considered as “plant” and ITC can be availed for construction of such building if the same is used for further supply of services like renting, leasing etc. However, if the building is used for own use, then ITC will not be available.

6. Further, in regard to the constitutional validity of Section 17(5) clause ( c) and (d), the Apex Court has relied upon the decision in the case of Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (9) TMI 626 - Supreme Court and held that the provisions of Section 17(5), clause (c ) and clause (d) do not meet the test of reasonable classification, which is a Part of Article-14 of the Constitution of India. To satisfy the test, there must be an intelligible differentia forming the basis of the classification, and the differentia should have a rational nexus with the object of legislation. It is further held that the right of ITC is conferred only by the Statute; therefore, unless there is a statutory provision, ITC cannot be enforced. It is a creation of a statute, and thus, no one can claim ITC as a matter of right unless it is expressly provided in the statute. It cannot be disputed that the legislature can always carve out exceptions to the entitlement of ITC under Section 16 of the CGST Act.
7. Moreover, the Hon’ble Apex Court has also analysed the meaning of the term ‘On his Own Account’ used in clause (d) of Section 17(5). In this regard, clause 32 of the judgment of the Hon’ble Apex Court is worth noticing which I wish to quote herein below:

“32. Clause (d) of Section 17(5) is different from clause (c) in various aspects. Clause (d) seeks to exclude from the purview of sub-section (1) of Sections 16 and 18, goods or services or both received by a taxable person to construct an immovable property on his own account. There are two exceptions in clause (d) to the exclusion from ITC provided in the first part of Clause (d). The first exception is where goods or services or both are received by a taxable person to construct an immovable property consisting of a “plant or machinery”. The second exception is where goods and services or both are received by a taxable person for the construction of an immovable property made not on his own account. Construction is said to be on a taxable person’s “own account” when (i) it is made for his personal use and not for service or (ii) it is to be used by the person constructing as a setting in which business is carried out. However, construction cannot said to be on a taxable person’s “own account” if it is intended to be sold or given on lease or license.”

This judgement is landmark decision in regard to availability of ITC on construction activity, which are blocked under section 17(5) clause ( c) and (d) of the CGST Act. It is observed that the Hon’ble Apex Court has settled the position of clause (c) of Section 17(5) and stated that the legislature has the power to disallow ITC in relation to certain categories of Goods and/or services. The said clause disallows ITC on Works Contract Services if used for Construction of Immovable Property other than “Plant and Machinery”. Therefore, ITC on Works Contract Services used for Construction of Plant and Machinery is allowed. 

However, in regard to clause (d), the Hon’ble Apex Court has identified two important questions required to asked before disallowing ITC which are :

1. Whether ITC in relation to Goods and/or Services procured are in relation to construction of “plant” or “machinery”?
2. Whether the Construction of immovable property is on OWN ACCOUNT?

Amendments proposed in the Finance Bill 2025

The GST Council in their meeting held on 21.12.2024 has recommended to replace the phrase “ plant or machinery” with the term “plant and machinery” and accordingly the Finance Bill 2025 has proposed a key amendment in clause (d) of Section 17(5) where in the word “plant or machinery” has been proposed to be replaced to “plant and machinery” retrospectively with effect from 1^st July 2017. Therefore, the intention of the government is very clear that is to negate the judgment of the Apex Court. Here the main question is whether the proposed amendment will at all able to supersede the Hon’ble Apex Court’s Judgement. Let us analyse:

First of all, retrospective amendments are not expressly forbidden as per the Constitution of India. Therefore, it cannot be said that retrospective amendments are expressly unconstitutional. However, time and again the judiciaries have decided to struck down the retrospective amendments in laws as unfair.

Moreover, the Hon’ble Supreme Court has interpreted the law as was in force at the time of pronouncement of the verdict. Later on by way of bringing a retrospective amendment the exchequer cannot negate the interpretation made by the apex court based upon the law for the time being was in force. Further, the reason for bringing an amendment mentioned in GST Council’s meeting is to align it with the intent of the government which took 6 long years after implementation of GST law.

The questions still unanswered

In the given case, the retrospective amendment proposed in the Finance Bill 2025 is to replace the wordings “plant or machinery” with “ plant and machinery”. The definition of ‘plant and machinery’ is already present in the proviso to section 17(5) clause (d) and therefore, there shall be no scope to interpret the definition of “plant” as analysed by the Hon’ble Supreme Court. To that extent it will be in favour of the revenue. However, there shall be lot more questions which remain unresolved in respect of Section 17(5)(d) like:

1. The said clause has stated that the construction shall be on “own account”. What does this “own account” means. Here it is not denied that ITC is not available if somebody constructs a building for his/her residence. However, if a factory is getting constructed where taxable products are going to be manufactured, can it be said that the construction is done on ‘own account’. Moreover, if a service provider builds up his office from where taxable services will be provided can it be said that the construction is on ‘own account’. Interestingly, clause ( c) of Section 17(5) never tells that construction shall be on own account. Therefore, even after the retrospective amendment, difference shall still remain between clause ( c) and clause (d) of Section 17(5) in regard to the term “own account” and one can still refer Safari’s case to refer the views of the Hon’ble Apex Court.
2. Moreover, both the clause ( c) and clause (d) of Section 17(5) directs the ITC is denied if works contract services or goods or services procured are for construction of immovable property. Now, upto what extent this provision can disallow credit. Suppose, a company has applied for a bank finance for a project which includes a significant or majority part as cost for construction of factory shed. For obtaining the finance, the company has to carry out various surveys, get valuations etc which do not have direct nexus to construction but are required for obtaining the loan. Does these credits are denied under clause ( c) or (d) of Section 17(5). The situation may not yet be envisaged by the law makers.
3. As per GST laws, Composite Supply of Works Contract is a Service. If that is so, then what would be utility of clause ( c) because clause (d) itself covers goods or services or both. This is also not clear as per the provisions of the section.

Conclusion

The Judgement of the Hon’ble Supreme Court is a welcome judgement which can be an eye opener for all of us in the industry and profession. It cannot be a striate jacket case the credit is not available on construction of immovable property. We need to analyse each and every case and decide whether credit can be availed or not. However, the retrospective amendment proposed in the Finance Bill will change the scenario to the extent of definition of “plant” as analysed by the Hon’ble Apex Court. However, there are lots of issues which may arise in future in regard to disallowance of ITC under clause (c ) and clause (d) of Section 17(5). A careful and conscious decision shall be taken by the Industry on case to case basis instead of simply disallowing ITC on construction activity.